US bonds plunge

US Treasury debt prices fell on Friday, lifting yields off historic lows, as traders took profits from this week's dramatic gains and after the government cast a lifeline to struggling US automakers. Despite the day's sell-off, yields on long-dated Treasuries fell for a seventh straight week, the longest such streak since the summer of 2002 when they fell for 10 weeks in a row.
Both 10-year and 30-year yields, which move inversely to their prices, fell 40 basis points on the week, mainly driven by the Federal Reserve's reiteration on Tuesday it was considering buying longer maturity Treasuries. The price on benchmark 10-year Treasury notes last traded down 23/32 after losing more than a full point. Their yield, which moves inversely to price, was 2.14 percent, above a five-decade low of 2.05 percent set earlier and up from 2.06 percent late on Thursday.
Ahead of the weekend, investors wanted to cash in on some gains. "I just think we have run so far so fast: we have seen a 150 basis points decline in 10-year yields in 30 days," said Marty Mitchell, head of government bond trading at Stifel Nicolaus & Co in Baltimore, Maryland.
Investors were also starting to tentatively buy non-government bonds to capture higher yields, which was adding to the pressure on Treasuries, he said. The White House's decision to make $17.4 billion in short-term loans to the ailing carmakers alleviated some worries of an imminent collapse of the US auto industry and a deepening of the recession.
In the wake of the auto bailout, stocks posted some gains, curbing safety bids for US government bonds. The Treasury market sell-off was partly "tied to the news of the auto bailout. It's motivating some profit-taking before the weekend," said Kim Rupert, managing director for global fixed income analysis at Action Economics LLC in San Francisco. The profit-taking followed a breath-taking surge spurred by the Federal Reserve's pledge earlier this week to use all means, including possibly buying long-dated Treasuries, to keep borrowing costs at rock-bottom levels for a long time.
The yield gap between 10-year and two-year notes shrank about 40 basis points on the week, the second biggest weekly flattening of this part of the yield curve since 1981. Since peaking in mid-November, the two-to-10-year part of the yield curve has flattened nearly 125 basis points, signalling increased expectations that US rates will stay low for a sustained period.
The 30-year bond was down 1-10/32 in price with its yield at 2.57 percent, above the all-time low of just below 2.51 percent touched in earlier trading. Among short-dated maturities, one-month Treasury bills last traded at 0.02 percent, flat from Thursday.
Market anxiety, which has driven a strong bid for the safest assets such as ultra short dated Treasury bills, remained high despite more government measures aimed at reviving a flagging global economy. The Bank of Japan, as expected, lowered key interest rates to almost zero, three days after the US Federal Reserve made a similar move.
Moreover, the Fed, the European Central Bank, the Bank of England and the Swiss National Bank said they will offer more cheap dollar funds next year to ease stress in credit markets. Economic uncertainties, together with seemingly unbridled appetite for safe, long duration assets, could push Treasury yields further into uncharted territory in the coming days, analysts said.
On the other hand, the Treasuries rally could encounter some resistance from a renewed deterioration in the dollar and the looming debt supply so the government can offset a ballooning deficit and fund various bailout measures. The Treasury Department is scheduled to sell a record $38 billion in two-year notes on Monday and an exceptionally high $28 billion in five-year debt on Tuesday.